07 May 2015

Another Look at Growth

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Real-GDP

Scott Grannis calculates just how much economic growth we’ve lost, for some unknown reason, over the course of the last six years.

Real GDP growth in the first quarter was weaker than expected (0.2% vs. 1.0%), but it wasn’t much of a surprise. It’s now been almost six years that the economy has managed only meager growth—about 2 ¼% per year on average. As a result, by my calculations, real GDP is a little over 10% below its long-term trend potential. That’s more than $2 trillion in lost income every year, and it’s getting worse. …

The chart above compares the level of real GDP to a long-term trend growth rate of 3.1%. This confirms once again that we are stuck in the slowest recovery ever. It’s my belief that the persistence of slow growth is largely the result of bad policies, though demographics likely plays a part too. Corporate profits have been very strong, but business investment has been very weak. Without new investment and risk-taking, we are not going to see a pickup in productivity which is, at the end of the day, what drives stronger growth and higher living standards. Investment has been weak probably because marginal tax rates and regulatory burdens have increased significantly in the past six years. In a sense, and expansion of government has suffocated the private sector.

Things are not going to change much for the better until policies become more pro-growth.

Whether the persistence of relatively weak growth is a reason for the Fed to continue to keep short-term interest rates extraordinarily low is one of the key questions of our time. I don’t see how low interest rates stimulate investment or enhance productivity. Only private initiatives can do that.

On the bright side, if policies do become more favorable, there is tremendous upside potential to look forward to. Closing the GDP gap would be nothing short of exhilarating.

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Gonewiththewind

I think it is even worse than this analysis shows. The Fed is propping up the economy with about $1 trillion plus borrowing a year and a little less then $1 trillion a year of printing press money. Without this MASSIVE infusion the GDP would be negative every quarter since the beginning of 2009. This propping up not only cannot continue much longer it has also made the inevitable crash much worse. It will crash and it will be worse than the great depression for numerous reasons. It is potentially so serious that we may see the end of the U.S. and perhaps Democracy worldwide.



T. Shaw

GWTW: and, they’ll blame Bush and the free market.

Time to shift into survival mode.



Gonewiththewind

I agree. This could be very bad for people everywhere, not just the U.S. The great depression lasted over 10 years and only ended because of WW II. The FED is using all their economic tools to simply keep us propped up. If this crashes the FED would have nothing more that they could use to reverse it. It worries me.



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